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Victorian building law reforms - New domestic building dispute resolution regime

The Building Legislation Amendment (Consumer Protection) Act 2015 (Vic) (Act) received Royal Assent on 19 April 2016. The Act amends the Building Act 1993 (Building Act), the Domestic Building Contracts Act 1995 (Vic) (DBCA) and the Victorian Civil and Administrative Tribunal Act 1998 (Vic) (VCAT Act) with effect from 1 July 2017.

Key amendments implemented by the Act include:

the implementation of a mandatory conciliation and arbitration process to be conducted by Domestic Building Dispute Resolution Victoria (DBDRV);

increased building surveyor independence;

greater regulation of owner-builders;

reform to building practitioner registration and regulation; and

the abolition of the Building Practitioners Board.

The new DBCA dispute resolution provisions of interest to design professionals, building surveyors and professional indemnity insurers are summarised below.

Mandatory Conciliation Process

The amendments require a "domestic building work dispute" to be referred to DBDRV for conciliation before the building owner or building practitioners involved can commence proceedings in VCAT.

The Act creates a lack of symmetry between the types of disputes that are subject to the conciliation provisions and those that can be heard subsequently in VCAT. Section 53 of the DBCAgrants jurisdiction to VCAT to hear “domestic building disputes”. The Act creates a new definition (“domestic building work dispute”) for the types of disputes that must be conciliated.

Drafting ambiguity – subject matter threshold

A "domestic building work dispute", is defined as a dispute with the following two characteristics:

Parties: The dispute must be between a building owner, and any one or more of the following: a builder, registered building practitioner, sub-contractor, or architect; and

Subject matter: The dispute must relate to a domestic building contract or the carrying out of domestic building work, including any claims by owners in respect of defective or incomplete work and claims by builders for payment under a domestic building contract.

Architects, building designers, engineers, subcontractors and building surveyors, are specifically identified as potential parties to a "domestic building work dispute". It is anomalous that design practitioners are named as potential parties, given that section 6 of the DBCA states that the DBCAdoes not apply to them. Further, since design practitioners, building surveyors and subcontractors do not enter into domestic building contracts, disputes involving those practitioners will not have a nexus with the subject matter requirement. Nevertheless, the prevailing view among domestic building lawyers is that the intention of the Act is that disputes involving design practitioners, building surveyors and subcontractors are to be subject to the mandatory conciliation provisions, but this issue will need to be decided by the Courts.

Suitability of disputes for conciliation

DBDRV must accept a conciliation referral unless conciliation is unsuitable on specified grounds including that the parties have refused to cooperate; there is no reasonable likelihood of the dispute resolving through conciliation; or the claim is frivolous or vexatious.

DBDRV will develop its own views on whether there is a "reasonable likelihood" that multi-party, expert-intensive building disputes, or disputes involving questions of proportionate liability can be settled through conciliation and before the parties complete interlocutory processes, such as discovery and exchange of expert reports.

Conduct of conciliation

DBDRV must develop its own rules for the conduct of conciliation. DBDRV's procedure will have to balance the need for economy and expediency against the need for parties to properly investigate and assert their rights.

Evidence of anything said or done by the parties during the conciliation is not admissible in VCAT or legal proceedings, with the exception of written communications from the conciliation officer to a party and reports prepared by an assessor (discussed below). Further, DBDRV will be authorised to communicate all information obtained while performing its functions to the VBA. Practitioners will need to ensure the documents produced during the conciliation process do not prejudice their position in any subsequent proceedings or inquiries.

Conciliation outcome

If the dispute is settled through conciliation, DBDRV will prepare a written conciliation agreement setting out the terms of the agreement, the action to be taken and time period in which the action is to take place. The Act does not contain a statutory mechanism for enforcing a conciliation agreement in the event of non-compliance.

Should the matter not resolve at conciliation the DBDRV will issue a certificate identifying that the matter did not resolve and whether the parties participated in good faith. Parties will be able to make submissions as to the content of the certificates.

Where a party refuses to participate in conciliation or does not participate in good faith, and that party is unsuccessful in a subsequent VCAT action, then VCAT must order costs against that party, unless it would be unfair to do so.

Dispute Resolution Order (DRO)

If the dispute fails to resolve through conciliation DBDRV can adopt what is essentially an adjudicative role and issue a DRO.

Who do DROs apply to?

The DRO can be issued to a "builder" or "building owner". The Act is unclear as to whether a DRO can be issued to design professionals and building surveyors. Those practitioners are not "builders" as defined in the DBCA. However, the effectiveness of the new dispute resolution regime is likely to be undermined if those practitioners must participate in conciliation but are excluded from the DRO process. The types of orders that can be made in a DRO relate to builders’ work, so the prevailing view is that the Act does not allow DROs to be issued to design practitioners and building surveyors. Again, the Courts will need to provide guidance on this issue.

Content of DRO

The DRO can require a builder to rectify defective work; rectify damage caused by work; or finish incomplete work required under a domestic building contract. The DRO can also require the builder to arrange for another suitably qualified practitioner to carry out work or to compensate the owner for the reasonable cost of work performed by another practitioner.

It remains to be seen how the DRO process will be employed where there are issues of contribution and proportionate liability between multiple building practitioners. Domestic building lawyers hope DBDRV will exercise its DRO powers sparingly in such disputes.

DBDRV’s findings as to whether or not domestic building work is incomplete or defective may be set out in the DRO. VCAT is permitted to take those findings into account in any subsequent proceeding.

DBDRV must deliver a copy of the DRO to the builder’s insurers. If the DRO provisions apply to design practitioners and/or building surveyors, then the insurers of those practitioners will need to implement procedures to receive and process DROs.

Compliance, variation and discharge

DBDRV will supervise compliance with DROs. DBDRV can amend, cancel or extend DROs upon application by the parties. Where there is a dispute as to whether a DRO has been complied with, it is anticipated DBDRV will rely on assessors to carry out inspections and report on compliance (discussed below).

DBDRV is empowered to issue a breach notice if a DRO is not complied with. A failure by a builder to comply with a DRO is grounds for the VBA (in place of the abolished BPB) to conduct an inquiry into the builder's conduct and impose disciplinary sanctions. A failure by an owner or builder to comply with a DRO entitles the innocent party to terminate the applicable domestic building contract and apply to VCAT for damages and other relief flowing from the termination of the contract. Presumably where there are multiple building practitioners involved in the dispute VCAT may, under section 60 of the VCAT Act and/or section 53 of the DBCA, join additional practitioners to any application for relief made consequent to the termination of the contract.

Review of DROs

A party to whom a DRO is issued can apply to VCAT for a review of the order within 20 days of receipt of the DRO or reasons for the decision. The DRO can be reviewed on the limited grounds that the DRO incorrectly describes the work to be rectified/completed; the period set for completing the work is unreasonable; or that the act or omission required by the order is unreasonable.

If the grounds for review are established, then VCAT can make any order it considers fair. It seems likely that once a DRO review application is granted, VCAT will have the jurisdiction and power to join design practitioners and building surveyors before granting relief.

A party who receives a breach notice can apply to VCAT for a review of the decision to issue that notice.

It is understood that review applications will go to VCAT's Building and Property List, and that VCAT is allocating extra resources to handle the expected workload.

Assessors

DBDRV can appoint architects and building practitioners as "assessors". DBDRV can, of its own initiative or on the request of a party to a dispute, direct an assessor to inquire into a domestic building work dispute. The assessor's primary function is to assess whether the work is defective or incomplete, but DBDRV can presumably ask the assessor to inquire into any aspect of the dispute.

Assessor's powers

An assessor has broad investigative powers, including to:

enter a building site and inspect or photograph the works;

carry out destructive or non-destructive testing;

require a person at the building site to give information orally or in writing, produce documents, and to give reasonable assistance; and

conduct any tests or obtain expert advice.

Under the DBCA a "building site" encompasses locations where a domestic building work has been or is about to be carried out, thus the powers of assessors will be exercisable at such locations before, during and after building work is carried out. It is expected that building practitioners will elect to store project information and records off site to the extent permitted by the Building Act.

Assessor's reports

After an investigation the assessor will prepare a report which will be provided to the DBDRV and the parties. The parties will have a limited opportunity to make a written submission to DBDRV about the subject matter of the report.

The assessor's report must state:

whether or not any building work is defective or incomplete (including work unrelated to the dispute); and

identify any defects that may adversely affect the health or safety of people or the amenity of the building.

The assessor may also state in the report the cause of the defective or incomplete work and recommend a preferred rectification/completion method.

When making such a recommendation, the assessor must have regard to the relevant domestic building contract, including the plans and specifications set out in the contract, and any other relevant matters.

If the assessor forms the opinion that there has been a contravention of the or associated regulations the assessor must state that opinion in a written report and provide a copy of the report to the VBA.

Getting ready for the new dispute resolution regime

When the new dispute resolution provisions take effect on 1 July 2017, there will be initial uncertainty as to whether architects, building designers, engineers and building surveyors are subject to the provisions, until such time as the provisions are challenged and ruled on by the courts. Prudent design practitioners, building surveyors, and their professional indemnity insurers, may need legal assistance to determine whether they should participate in the dispute resolution processes when asked to do so. In addition, professional indemnity insurers who cover those professionals will need to review policy excesses and premiums to account for the increased costs.

If the courts ultimately determine that the mandatory conciliation process applies to design practitioners and/or building surveyors, those parties will need to be legally represented during the dispute resolution process to ensure they are not disadvantaged in subsequent civil and/or disciplinary proceedings.

Even if the courts decide that the mandatory conciliation process does not apply to design practitioners and/or building surveyors, it seems likely that such practitioners will still be drawn into settlement negotiations with owners and builders that are ancillary to the conciliated dispute.

Design practitioners and building surveyors should review their professional services contracts and their professional indemnity insurance arrangements to ensure they are appropriately protected from the liability risks and increased dispute resolution costs likely to flow from the amendments. Section 132 of the DBCA prohibits any contract or agreement purporting to annul, modify, exclude, restrict or vary any right conferred by the DBCA. However, design professionals and building surveyors can still protect their interests through fee structures and through a range of appropriate contractual risk allocations that will not contravene section 132.

In addition to the amendments to the DBCA set out above, the Act proposes significant amendments to the Building Act, which will be discussed in a future update.

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